EU Again Ponders Silencing Rating Agencies

While credit rating agencies may not be the last word on the subject matter, you do have to wonder if the alternative of having such functions suspended altogether would inspire market confidence. Does 'shooting the messenger' help? But don't ask me; European bigwigs including the EU internal market commissioner are considering new measures to silence credit rating agencies...under certain conditions. It's tricky formulating such conditions since many may well wonder if the EU is simply shooting the messenger when sovereign debt of its less stellar performers comes under sustained pressure. From Dow Jones:

The European Union's executive is leaning toward proposing a ban on the issuing of sovereign credit ratings for countries in bailout talks, European internal market commissioner Michel Barnier said Thursday. "I think it's legitimate to have a special treatment when a country is in negotiation or is covered by an international solidarity program with the IMF or a European solidarity [program]," he said. Barnier said if the Commission comes to the view that rating for these countries are inappropriate, "we could ban it or suspend the rating for the necessary timeframe...I am studying this matter very seriously."

The EU is set to make a fresh round of proposals on tightening rules for credit rating agencies on Nov. 9. The 27-nation bloc has been tightening rules on rating agencies progressively since the financial crisis, with EU officials blaming them for helping to cause of the crisis and hitting out at some of their recent sovereign debt rating decisions.

Barnier had indicated previously that he liked an idea--originally proposed by now-International Monetary Fund chief Christine Lagarde--that the EU should prevent ratings for bailout countries. However, it had been unclear whether he would push for them to be included in the November proposals.

The mechanics are unclear on how EU-wide legislation can have international force:

As part of the changes already made, the EU has said that the European units of international ratings agencies must receive a license from the European Securities and Markets Authority [ESMA], the recently created regional financial supervisor to operate in the EU. That gives Brussels some direct authority over what the rating agencies do. However it is unclear what power ESMA would have to stop U.S.-based units of the major agencies issuing ratings that would no doubt continue to sway the markets.

And you also have to consider that European countries are themselves quite keen on receiving the highest credit ratings, criticisms they dole out notwithstanding:

While criticizing the ratings agencies, the euro zone itself widely uses the views of the agencies in its own programs. The 17 governments have insisted that the region's bailout mechanism, the European Financial Stability Facility has a AAA rating while the likes of the French and the U.K. governments have pledged to do everything possible to defend their AAA status.

So they're now in search for a kludge to facilitate, what, rating "censorship"...

In a press conference, Barnier acknowledged this was a "difficult" issue and said that Europe needed to "reduce its dependency on ratings." While Barnier gave no further details on the idea of banning some sovereign ratings, a person familiar with the situation explained when the ratings suspension or ban could be appropriate.The official said the ban would only be used in a "specific" set of circumstances.

That could include if the consequences of a ratings move led to "volatility" or a threat to financial stability. The person also said that the ratings could be banned if there were "imminent changes to the creditworthiness of a state because of negotiations" on a bailout program.

The EU's ratings concerns came to a head earlier this year as the three main agencies, Moody's Investors Service, Fitch Ratings agency and Standard & Poor's slashed the ratings on the likes of Greece, Portugal and Ireland, adding to the market turmoil over the spreading debt crisis.

Note though that EU bigwigs have been promising something similar but have not yet been successful in passing rating agency-muzzling legislation.

UPDATE: With S&P pondering a new round of downgrades should the Eurozone fall into recession, Barnier will be busy.